Andi Haswidi, Jakarta – The estimated drop in global economic growth within the next two years could pose serious setbacks to developing countries like Indonesia if governments failed to act properly, the International Monetary Fund warned Thursday.

Speaking at a seminar held by Standard Chartered Bank in Jakarta, IMF's senior resident representative Stephen Schwartz said the global economy was likely to slow down in the coming years, with an estimated decline in the GDP growth of the world's major players – China, the United States and Japan.

It was vital for developing countries to pursue sound and stable policies to ensure the unfavorable global situation would not seriously impact their economies, he said.

Schwartz noted Indonesia was trying to make its investment climate more inviting by reforming its tax, investment and labor laws. However, important legislation in these areas was still being created, and investors were not sure whether it would be implemented next year as promised, he said.

One example was the employment bill's deliberation in the House of Representatives, which had stalled after vigorous protests from workers, he said. "Economic growth and investment in Indonesia has been lower than its potential. Indonesia has to improve its investment climate," Schwartz said.

Standard Chartered Bank chief regional economist Nicholas Kwan said Indonesia and other Asian countries had to improve its rate of investment if it was to survive the fiercer competition that would come from the decline in the global demand within the next two years.

"One key point in the region as a whole is that we invested too little, especially after the crisis. We would like to see the region invest more," Nicholas said.

The bank forecasts that in the next two years, US economic growth is projected to fall from 3.3 percent in 2006 to 2.8 percent in 2007 and down to 2.5 percent in 2008, while Japan's and China's growth rates will also decrease slowly.

For Indonesia, the SCB forecasts the economy will grow at an average of 6 percent in 2007 – 0.3 percent lower than the government's estimate – and increase at the same rate in 2008.

"Clearly the government has been doing a good job on the macro economic management side... but the real challenge we believe is to improve the investment climate," Schwartz said.

Schwartz said the government was aware of the need to improve legal certainty and tax administration through better enforcement. "We know what the problems are, and they have been there for a long time. What we need to question is the implementation," he said.

SCB senior vice president Fauzi Ichsan criticized the government's inability to meet its targets. He said the government had failed to efficiently use its 2006 budget, worth US$150 billion, with almost 80 percent of it still unspent.

"The government is currently sitting on huge amount of cash that should have been used for building infrastructure that could have supported the investment climate in Indonesia in terms of the distribution of goods and other supporting services," Ichsan said.

Trade Minister Mari Pangestu, who arrived at the end of the seminar, said she was aware of the issues discussed by the analysts.

"We were late in a comeback from the crisis. Perhaps we were one of the laggards, but I think it was sort of a worthwhile wait because the reason we were late was because we were the only country in the region that went through a total transformation, economically, politically and so on," she said.

About the economic reform packages, Mari said that talks between the government and legislators about the tax and investment bills would soon be finalized and hopefully they would be approved by the end of the year.

Mari said the government was working to improving the macroeconomy by reforming institutions like the customs and tax offices. "Between the finance and the trade ministries, we are going to create a single national (office) for processing exports and imports," she said.

Other short-term measures to boost growth would be the establishment of special economic areas, she said.